Reinsurance prices are still heading upward, but no one is ready to call it a hard market yet.

Continuing the trend of recent renewals, the property retrocessional market is proving the toughest for reinsurance buyers at year end, while rates are also rising for property catastrophe reinsurance, non-catastrophe and a number of casualty reinsurance lines.

The property retro market remains so constricted that many reinsurers, unable to buy traditional retrocessional protection, are opting for finite risk or other alternative forms of coverage to spread their risk.

Property cat cover for U.S. insurers, meanwhile, is commanding single-digit rate increases where the ceding insurer has relatively small exposures or good loss experience and increases of 20% or more where insurers have suffered losses. European ceding insurers battered by 1999 and 2000 winter storms are seeing far bigger increases, in some cases a doubling of last year's rates.

Reinsurance prices for certain casualty lines are also rising, among them workers compensation, non-standard automobile and program business such as nursing home or trucking liability programs.

Despite the tightening conditions, though, many market observers say that reinsurers need further price hikes to restore profitability, and are waiting to see if the trend continues.

The current market is in "a period of transition," said David Tritton, executive vp-marketing for American Re-Insurance Co.'s domestic insurance company operations in Princeton, N.J.

"After years of soft conditions, the market is definitely improving, but how much is still uncertain. Underwriters would prefer to see a few years of sustained improvement vs. a one-year disruptive lurch," said Mr. Tritton.

The market "continues to show some degree of improvement in terms of pricing...and some more- sensible conditions, but it is certainly nowhere near the type of (hard) markets that existed in the past," said William Munson, chairman and chief executive officer of Toa Reinsurance Co. of America in Morristown, N.J.

"I wouldn't call this a hard market," agreed Paul Davies, chairman of Aon Re Worldwide Inc. in Chicago. "People are grasping at straws if they're calling this a hard market."

Some parts of the reinsurance market are tighter than others, though. Reinsurers' own catastrophe retrocessional programs are among the most difficult business to place at the end of the year, because capacity dries up and prices for what remains spiral upward.

One problem, market observers point out, is that no ready source of retro capacity has appeared to ease the shortage.

In previous renewal seasons, new retro capacity was offered by Bermuda catastrophe reinsurers, by Lloyd's of London underwriters and by Australian reinsurers. For the most part, those sources no longer exist.

"We're not seeing any Lone Ranger coming to the rescue this time around," said Sean Mooney, senior vp and chief economist with Guy Carpenter & Co. Inc. in New York.

Rate hikes on the retro capacity that is available are about 25% to 30% higher than last year, he said.

As a result, "a lot of people are forgoing traditional retro covers," said Steven Bolland, senior vp with Gill & Roeser Inc. in New York. Instead, these reinsurers are opting for finite risk and other alternative risk retro programs for which capacity is more plentiful.

"Most of the retro buyers have at least some part of their catastrophe purchase as finite, because it's just impossible to place in the traditional market," said Stephen Tirney, president and chief operating officer of PMA Reinsurance Corp. in Philadelphia.

Conditions are tightening--but not nearly as drastically--in the catastrophe reinsurance market.

"We started to see rates improving in the property business in regional-type business beginning in January in the mid-single digits, and that improved a bit in July and we're seeing even more improvement in the current renewal period," said David R. Robb, president-reinsurance operations for the Hartford Financial Services Group Inc. in Hartford, Conn.

Catastrophe property rates in "loss-free situations" are up 10% to 15% compared to a year ago and "if there are losses, it depends on how much loss," said William J. Adamson, chief executive officer of CNA Re, a unit of CNA Financial Corp. in Chicago.

U.S. insurers with losses on their cat programs could see rate hikes of 30% to 40%, depending on their region and degree of storm loss exposure, Mr. Bolland said.

Even these increases are small compared to those faced by French and other European insurers set upon by winter storm losses a year ago, he noted. Those insurers could see their rates double in their first reinsurance renewal after the Lothar and Martin storms struck in December 1999; at that time, terms already had been set for 2000 reinsurance renewals.

Following the European storms, many ceding insurers found themselves "severely under-reinsured," Mr. Bolland said. "Two storms in two weeks were storms of the century, and you should not get two storms of the century in two weeks."

Thus, not only are prices rising but many European insurers are trying to buy two to three times the reinsurance limits they had before, he said.

"It's not a great year to buy more reinsurance on the catastrophe side," Mr. Bolland said.

Aside from rates, few other terms of property cat coverage are tightening so far, market observers say.

This renewal season is bringing fewer multiyear catastrophe reinsurance contracts, Guy Carpenter's Mr. Mooney noted.

"Reinsurers obviously anticipate that rates will continue to go up and are not wanting to lock in rates at this point," he said.

One or two Lloyd's syndicates are pressing for such restrictions as exclusions for transmission and distribution lines, Mr. Bolland reported.

"In a harder market, they can push their pet peeves," he observed. "Most people are going with the flow."

The relatively light losses enjoyed by U.S. insurers this year will not slow down rate increases for cat coverage, observers agree.

"In the past, if you went through a season like we did, there usually would be price reductions on renewal. That's not taking place," said Mike Schell, president and chief operating officer of the New York-based global reinsurance operations of St. Paul Re, the reinsurance operations of The St. Paul Cos. Inc.

"The lack of U.S. property catastrophe activity has had a minimal impact on the market, whereas the European storms definitely impacted results and thinking," American Re's Mr. Tritton said. "Since property catastrophe reinsurance is a global spread business, a lack of activity in one territory does not necessarily have a major effect."

Both reinsurers and insurers have also become much better in understanding cat exposures and their long-term costs, so they are putting more emphasis on exposure pricing and less on experience pricing, Mr. Schell added.

A key reason for the tightening in catastrophe and other lines, though, is reinsurers' overall poor financial performance over the last several years, observers agree.

"There's still plenty of capacity out there, but the thing that's really turning the rates are the results," PMA Re's Mr. Tirney said. "The year-end reinsurance results are going to be somewhere north of a 112% to 115% (combined ratio). That's driving results-you can't write business at that (level)."

"The big players are much more bottom-line oriented than in the past," said Andreas Beerli, chief executive officer of Swiss Reinsurance Co.'s Swiss Re America division in Armonk, N.Y. "We are working very hard to have only business where we expect positive results."

"It seems to me that it took five or more years for pricing to get to the level it was at the end of 1999, and repairing that will not happen all in one year," Mr. Robb said. "So I think this is a two- or three-year time frame for improvement."

Property treaty reinsurance, meanwhile, is heading in the same direction that catastrophe renewals have gone.

Over the last few years, an increasing number of property programs have been reinsured on a proportional basis rather than an excess-of-loss basis, observers note.

Under proportional coverage, reinsurers take a percentage of the ceding company's loss for a percentage of its premium. Reinsurers have favored these covers because they generate more premiums than do excess covers, though they also expose reinsurers to higher losses.

That trend is now reversing itself, with many reinsurers imposing restrictions on proportional contracts or encouraging cedents to shift to excess contracts.

For example, reinsurers are cutting the amount of ceding commission they will pay insurers for their business and are pushing to increase retentions and reduce the per-occurrence caps on reinsurance payouts, PMA Re's Mr. Tirney said.

Some cedents that balk at these terms are turning instead to excess-of-loss structures, he said.

"There is a significant shift away from proportional business," Gill & Roeser's Mr. Bolland said, noting that reinsurers are more likely to use their capacity this year to write excess business.

While this may improve reinsurers' loss experience, it will also have the effect of reducing premium volumes.

"If people are pulling back from proportional, it will be interesting to see what happens with the top- line numbers," Mr. Bolland said. He said he wondered whether reinsurers would try to make up the lost volume by expanding in other lines.

Excess coverage, though, is not dropping in price.

Reinsurers are getting rate hikes of between 8% and 12% for property-per-risk excess contracts that have little or no catastrophe loss exposure, while excess contracts that have produced losses are renewing with hikes of 25% or more, Mr. Tirney said.

Unlike the property reinsurance market, which has been tightening broadly and steadily, the casualty market presents more of a mixed bag, market observers report.

"In the casualty area, workers comp, nonstandard auto and some of the specialty kinds of coverages are seeing a lot more rate firming than standard commercial auto, general liability and umbrella," Hartford's Mr. Robb said.

He noted that though rates for casualty coverage are strengthening, they are not rising as much as are property rates. Mr. Robb estimated the increase at "less than 10%."

Specialty lines program risks, such as nursing home or trucking liability programs, are seeing firming rates for both underlying primary insurance coverage and reinsurance, brokers and reinsurers say.

"We are seeing a lot greater growth in surplus lines companies, because standard companies are starting to push that business out," Aon Re's Mr. Davies said.

Because surplus lines insurers tend to buy more reinsurance than do admitted market insurers, reinsurers may see more of this business than they have in the past, he said.

Mr. Davies added that he has seen instances of "class underwriting" by reinsurers that drop certain categories of business without examining whether poor experience with the class can be turned around.

"They're throwing the baby out with the bath water," he said. "I don't think some reinsurers and some brokers are taking the correct amount of time to visit with ceding companies to see what is being done to correct situations."

Tightening in various casualty lines is contributing to what several observers predict will be a late renewal season.

"My view is you're going to have a December 60th this year," CNA Re's Mr. Adamson joked, "because the casualty business is so log-jammed. There's a mismatch between reinsurers' rate need and clients' willingness to pay."

"It's going to be a long season," Mr. Bolland agreed.

Reinsurers say ceding companies have delayed marketing their programs.

Some cedents, meanwhile, have tried to renew existing proportional coverage, have come up with holes in their programs and are having to consider restructuring the programs with excess-of- loss coverage, Mr. Bolland said.

"I think it's going to drag into January," he said.